Tuesday, October 23, 2012

A Fractured Court of Appeals Affirms the “All or Nothing” Rule for Letters of Intent

A Fractured Court of Appeals Affirms the “All or Nothing” Rule for Letters of Intent

      A recent decision of the Court of Appeals, by a panel as fractured as is possible, has affirmed the existing “all or nothing” rule applicable to letters of intent.  Spears v. Kentucky Insurance Agency, Inc., __ S.W.3d __, 2012 WL 4839015 (Ky. App. Oct. 12, 2012).  In so doing, the court applied Cinelli v. Ward, 997 S.W.2d 474 (Ky. App. 1998).  That application was, however, rather contentious.  This ruling led to an opinion by Judge Vanmeter for which there was a concurrence from Chief Judge Acree given through clenched teeth and a dissent by Judge Moore.
      This case arose against the background of Cinelli v. Ward, wherein there was adopted the “all or nothing” rule with respect to letters of intent and similar contracts.  Under that rule, “either the agreement is enforceable as a binding contract to consummate the transaction or it is unenforceable as something less.”  As such, a letter of intent that does not recite all of the material terms of the transaction will not give rise to an enforceable agreement.
      Spears, who operated an insurance agency, was seeking a new insurance company with which to affiliate.  In November 1998, he began discussions with Kentucky Insurance regarding such a new affiliation.  Following initial discussions, Kentucky Insurance presented to Spears a letter regarding the formation of that new organization.  The letter, signed by the president of Kentucky Insurance Agency, was counter-signed by Spears.  The parties then began fairly intensive activities to bring about the new organization in accordance with the terms of the letter of intent, including by Spears procuring clients’ signatures authorizing the transfer of their business to the new agency.

      Just more than a month after the letter of intent’s effective date of November 15, on December 18, Spears was informed that the other parties did not intend to proceed with the transaction.   Spears then sued, seeking to enforce the letter of intent.  In response, Kentucky Insurance filed for summary judgment, arguing that the letter of intent was unenforceable under the rule of Cinelli v. Ward, which motion was granted:
The trial court further noted that because the language of the letter indicated that the parties would enter into a non-compete clause, an exit agreement, and a standard arbitration agreement at a later date, the letter was not an enforceable agreement because it left terms open for negotiation.  Slip op. at 6, 2012 WL 4839015, *2.
      Ultimately affirming the trial court’s grant of summary judgment, in laying out the applicable law, the Court of Appeals wrote:
In Cinelli v. Ward, this court stated that if “an agreement leaves the resolution of material terms to future negotiations, the agreement is generally unenforceable for indefiniteness unless a standard is supplied from which the court can supplant the open terms should negotiations fail.” Cinelli, 997 S.W.2d at 477. “`To be enforceable and valid, a contract to enter into a future covenant must specify all material and essential terms and leave nothing to be agreed upon as a result of future negotiations.’“ Id. at 477 (emphasis added) (quoting Walker v. Keith, 382 S.W.2d 198 (Ky. 1964)). Stated simply, “[t]he terms of a contract must be complete and sufficiently definite to enable the court to determine the measure of damages in the event of a breach.” Mitts & Pettit, Inc. v. Burger Brewing Co., 317 S.W.2d 865, 866 (Ky. 1958). However, “[i]f all the material terms which are to be incorporated into the contemplated future instrument have been agreed upon, it may be inferred that the instrument is to be a mere memorial of the contract already final by the earlier mutual assent of the parties to those terms.” Dohrman v. Sullivan, 310 Ky. 463, 468, 220 S.W.2d 973, 976 (1949) (citation omitted).  Slip op. at 8, 2012 WL 4839015, *3.
      Providing but one example to the open terms, the court noted that the parties anticipated negotiating the terms of a non-competition agreement.  As to the absence of agreement as to material terms, it wrote “What would be the duration and/or geographic scope of any non-competition clause?  One year?  Two years?  Madison County?  Madison and contiguous counties?”  Slip op. at 8-9, 2012 WL 4839015, *4.
      On that basis, Judge Vanmeter was able to dispose of the case.
      As noted above, Chief Judge Acree concurred with Judge Vanmeter’s opinion, but he did so through clearly clenched teeth:
I concur with the majority because I must; Cinelli v. Ward, 997 S.W.2d 474 (Ky. App. 1998) is precedent. I write separately, however, because the time has come to revisit the rule established by Cinelli.  Slip op. at 9, 2012 4839015, *4.
      Chief Judge Acree went on to review the modern trend of cases as espoused in TIAA v. Tribune Co., 670 F. Supp. 491 (S.D. N.Y. 1987), but he does not in detail recite his interpretation of the TIAA rule beyond suggesting that it would allow the enforcement of incomplete agreements by, presumably, inserting reasonably ascertainable provisions.  Speaking to the Kentucky Supreme Court, Chief Judge Acree wrote, referencing the Cinelli decision:
In 1998, this intermediate appellate court consciously rejected the modern trend articulated in TIAA. It is now time for our Supreme Court either to consciously embrace it, or to justify clinging to the minority Kentucky rule.  Slip op. at 11, 2012 WL 4839015, *5.
      Dissenting from the ruling, Judge Moore argued that “all of the material terms necessary for the formation of a final and enforceable agreement were contained in the letter of intent,” characterizing the “non-compete clause, exit agreement, [and] standard arbitration agreement” as “minor” issues.  Rather, he posited that there were not “actually contemplated additional negotiations regarding those terms, as opposed to the addition of ‘standard’ boilerplate terms.”  He wrote as well:
Furthermore, the agreement between the parties contemplated the formation of a business, the finalization of which would have involved the formality of filing corporate documents.  The terms contained in the agreement were sufficient to outline the day-to-day operations of the company and responsibilities of each of the parties and would have been sufficient to allow the parties to complete the corporate paperwork.  Slip op. at 11-12, 2012 WL 4839015, *5.
On that basis, he would have held a binding complete agreement to have been entered into from which Spears’ damages could be ascertained.  Ergo, where Chief Judge Acree would question the continued viability of Cinelli, Judge Moore would have found its requirements to have been satisfied.
      In my opinion, the decision reached by the Court of Appeals was correct within the confines of the existing rule of Cinelli v. Ward; frankly, I have not studied TIAA and similar opinions enough to have an informed view as to whether or not Cinelli v. Ward should be set aside.  I do, however, have an opinion with respect to Judge Moore’s dissent and its suggestion that the various agreements such as non-competition are either immaterial or can be objectively ascertained.  With respect to that one example, having been through I have no idea how many negotiations as to the terms of a non-competition agreement, they simply are not standard or mechanical.  Issues of duration, geographic scope, the tolling the duration during any period of breach and the nature of the limitations (e.g., non-competition v. non-solicitation) are typically highly negotiated and particularized for the transaction at hand.  Often they are further complicated when one of the parties to the transaction brings a book of business.  On that basis, I cannot agree with Judge Moore’s assessment.
      In the same vein, I cannot agree with his suggestion that the formation of the intended corporation involved the “formality of filing corporate documents.”  While the appendix to the letter of intent did recite the anticipated share allocation, and there was agreement that it would make an S-corp election, none of the other terms were addressed.  For example, there existed no agreement as to who would be the initial directors and initial officers of the organization.  There was no agreement as to the per-share purchase price!!!  There was not even agreement that the corporation would be organized in Kentucky, even though the jurisdiction of formation could have a material impact upon the rights and responsibilities of the shareholders; a Delaware and a Kentucky corporation embody very different rules and responsibilities.  The structuring of a corporation is not a “formality” but rather an involved negotiation of numerous zero-sum issues.
      This case should be watched to see whether it is accepted by the Kentucky Supreme Court, as essentially requested by Chief Judge Acree, for further consideration.  Alternatively, a motion for en banc reconsideration could be a possibility.

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